The role of information uncertainty in moving-average technical analysis: A study of individual stock-option issuance in Taiwan

- Stocks without option issuance are described by greater information uncertainty.
- Moving average (MA) beats buy-and-hold strategy on stocks without option issuance.
- MA seems not to outperform buy-and-hold strategy on stocks with option issuance.
- Annualized return from MA on stocks without option issuance is about 20−25%.

Using a sample of Taiwan stock market, this paper investigates the role of information uncertainty in the profitability of technical analysis by applying a moving average (MA) strategy to portfolios grouped according to whether firms issue stock options. Results indicate that, even though considering transaction costs, the MA strategy significantly outperforms the buy-and-hold strategy on the portfolio without option issuance, but not on the portfolio with option issuance. The results support the hypothesis that stocks that do not issue options exhibit greater information uncertainty, and thus greater price continuation, which in turn implies a superior performance of the MA strategy.